2024 (1) TMI 164 - AT - Income Tax

TP adjustment - addition towards interest at a rate of 2% - TPO was of the view that the assessee has provided excess credit period to its US AE over and above the stipulated credit period and called on the assessee to explain why an adjustment should not be made on account of excess grace period - TPO also observed that the assessee has charged 10% interest from its German AE for Euro denominated loan granted by the assessee and called on the assessee to also explain as to why interest @10% should not be charged on the delayed receipts on account of software services provided to the US AE HELD THAT - We notice that the co-ordinate bench in assessee s own case 2023 (6) TMI 1349 - ITAT MUMBAI A.Y. 2005-06 has considered a similar issue to hold that adjustment is required to be made towards interest on the delayed receipts from US AE. It is relevant to note that the department had filed a cross appeal for AY 2004-05 2011 (6) TMI 140 - ITAT, MUMBAI on the same issue against the decision of CIT(A) to apply LIBOR rate as against 10% rate charged by the TPO. The coordinate bench vide order dated 30.06.2011, though has dismissed the revenue's appeal on the issue of rate to be applied had made a specific observation that though the CIT(A)'s action with regard to rate is upheld, it does not imply that the ALP adjustment in principle is upheld too. Accordingly the issue of determination of ALP by imputing interest on the delayed receipts from US AE is left open which we have adjudicated in the current appeal. Appeal is allowed in favour of the assessee.

Summary

Issues Involved:
1. Confirmation of addition towards interest on delayed receipts from US Associated Enterprise (AE).
2. Determination of Arm's Length Price (ALP) for the extended credit period granted to AE.

Summary:

1. Confirmation of Addition Towards Interest on Delayed Receipts from US AE:
The primary issue was whether the CIT(A) erred in confirming the addition of Rs. 37,50,475 towards interest at a rate of 2% on delayed receipts from the US AE. The Tribunal had previously remanded the issue to the Assessing Officer/TPO to verify the credit period and interest rates available in the open market. The assessee argued that no interest should be charged as they did not charge interest on similar extended credit periods to third parties (non-AE). The Tribunal, referencing jurisdictional High Court decisions (CIT vs Indo American Jewellery Ltd and CIT vs M/s Living Stones), held that no adjustment is required for notional interest on delayed receipts from US AE, as the assessee uniformly did not charge interest to both AE and non-AE.

2. Determination of ALP for Extended Credit Period Granted to AE:
The TPO had initially computed a TP adjustment of Rs. 1,87,52,378/- based on a 10% interest rate, equating the extended credit period to a loan. The CIT(A) reduced this adjustment to Rs. 37,50,475/- by applying a 2% interest rate, considering the USD LIBOR rate plus a markup. The CIT(A) acknowledged the differences between trade credit and loans, noting that the AE in the USA was incurring losses and the extended credit period was to help manage liquidity. The Tribunal, however, found that since the assessee did not charge interest on extended credit to non-AE, no interest should be charged to AE, aligning with previous High Court rulings. Consequently, the Tribunal concluded that no ALP adjustment is required for the extended credit period.

Conclusion:
The Tribunal allowed the appeal in favor of the assessee, ruling that no interest should be charged on the delayed receipts from the US AE, and no ALP adjustment is required for the extended credit period. The decision was based on the consistent practice of the assessee not charging interest on similar transactions with non-AE and supported by relevant High Court judgments.